Monday, July 31, 2017

IRS Now Actively Seeking Bitcoin Tax Evaders

MillarLaw has put out the following advisory (my highlight):

There is a widely held misconception that using virtual currency such as BitCoin assure the users that their transactin is anonmyous. For this reason virtual currency is used to move money from countries with currency control to countries where they funds can be used without restriction and for other transaction, such as arms dealing, money laundering, tax evasion, and other criminal activities. A vibrant market place also exists for virtual currency through "exchanges", such as Bitcoin and Coinbase. The use of highly encrypted software and the "dark web" makes investigation very time consuming to handle on a one on one basis. The difficulty may now be changing.

The IRS acting through the Tax Division of the Justice Department recently sought a John Doe Summons for records of Coinbase, a virtual currency exchange. The Summons seeks records of all customers of Coinbase including identifying information and transaction histories. The ratoinale for this the use of a John Doe Summons is :

"The IRS has launched an investigation to determine the correct federal income tax
liabilities for taxable years 2013-2015 of United States taxpayers who have conducted transactions in a “convertible virtual currency” as that term is defined in IRS Notice 2014-21. The taxpayers being investigated have not been or may not be complying with U.S. internal revenue laws requiring the reporting of taxable income from virtual-currency transactions."

The presumption is that many of the taxpayers using Coinbase or Bitcoin are under reporting their income. The IRS has a history of using the John Does Summons procedure as exemplified by the Swiss bank cases. In the case of the Swiss bank investigation John Does Summones were used to gather information from the Swiss Banks about U.S. taxpayer with unreported foreign financial accounts who have failed to come forward and enter the Offshore Voluntary Disclosure Program. A number of prosecutions have resulted.

Those taxpayer who are using virtual currency need to be aware that once they are identified the U.S is signatory to numerous "information exchange agreement" and that to the extent they are using virtual currency to avoid currency controls their information could be turned over to other governments.

What all this means is that the customers of virtual currency exchanges will likely face IRS examination and depending on the nature of the offense, prosecution.

The idea that Bitcoin is some type of libertarian currency that will allow users to operate outside the prying eye of governments is absurd. It is a very trackable form of exchange.

3 comments:

Agreed, insofar as folks seeking anonymity trade through centralized exchanges (which are obvious targets). But BTC has other uses, such as paying for goods and services, and, to the extent users pay the vendors directly, the state would have to invest many more resources to track these transactions, on a scale that even the state might deem it not worth it.

BTC's main libertarian concept, surely, is that it is capped at 21 million units and the state cannot manufacture more of them. Thus if it ever graduates from a medium of exchange to money, BTC will hold its value more than the state's fiat currency, and even if banks want to get in on the action and lend out BTC deposits, they'd be doing so on a 100% reserve basis since the Fed could not bail them out with newly mined units.